NZD falls sharply against US

The NZD/USD was on a gradual ascent after yesterday's strong NBBO release. It was then knocked sharply lower this morning to trade around 0.8380 currently.

The latest National Bank Business Opinion survey was nothing short of stunning. For all the talk of downside risks to the economic expansion, largely courtesy of Europe, the survey was a clear reminder that upside risk exists too.

The increase in the headline confidence reading to 28.0 from 16.9 was all very interesting, but the real story is the fact that the own-activity reading remains at a heady level (31.2 vs. 25.7 previously). At face value the extent of the confidence that businesses have about their own performance could be considered as being consistent with GDP growth approaching 4.0% in the coming year. We are forecasting nothing of the sort. On an annual average basis, we are picking growth of 2.2% for calendar 2012 with annual growth peaking at 3.0% in June 2013.

The reading set the NZD/USD on a steady upward path. It was then boosted late last night after strong demand was seen at the ECB's LTRO auction (see Fixed Interest). However, early this morning US Fed Chairman Bernanke made comments (see Majors) that saw the USD surge. The NZD/USD promptly fell from highs close to 0.8470, to 0.8380 currently. Though the NZD/USD is now back in familiar territory, last nights highs were an unsustained breach of the key resistance level of 0.8420.

The NZD/EUR was on a general uptrend over the past 24-hours. It had a marked step up after the results of the ECB's LTRO auction, that failed to provide much boost to the EUR specifically. The NZD/EUR currently grade around 0.6280.

Today we get the NZ terms of trade for Q4. These are important, as a rising trend in NZ's terms of trade has been a key underpinning for the currency in recent times. Although we suspect NZ's terms of trade have now peaked, we do not expect a precipitous fall in the year ahead. Market sentiment will also be driven by Manufacturing PMI data released globally today. We continue to see NZD/USD support at 0.8350 and resistance at 0.8420.

Majors

Overnight, the ECB's much anticipated LTRO auction saw strong demand. However, the more significant driver of currencies was US Fed Chairman Benanke's comments early this morning. The USD surged from 78.10 to 78.70.

The USD was tracking largely sideways in a 78.10 to 78.30 range. It navigated the ECB's LTRO auction, an upward revision to US Q4 GDP (3.0% from 2.8%) and a stronger-than-expected Chicago PMI (64.0 vs. 61.0).

However, it took flight early this morning after Bernanke's comments at the semi-annual testimony to the House. While his comments were cautious, they appeared to surprise the market that had been expecting a more dovish tone, and hints of further quantitative easing. Such hints were absent, and there were small touches of less downbeat language, such as describing "positive developments" in the labour market. The USD index shot from 78.10 to 78.70 after the comments.

The EUR appeared a little uncertain how to respond to the strong uptake at the ECB's LTRO auction (see Fixed Interest). Is it positive as it provides liquidity to the financial sector, calming fears of dislocation, or is it negative as it suggests the sector really is in dire need? The EUR drifted off a little after results, but quickly stabilised, until Bernanke's comments early this morning. The EUR then fell sharply from 1.3460 to 1.3340 currently.

Trading in the GBP was fairly choppy overnight, but a slight uptrend was maintained. The GBP/USD traded up from around 1.5900 yesterday afternoon to 1.5930 currently. It spiked to 1.5990 early this morning, its highest level since the end of October last year.

The surge in the USD early this morning, also took the wind out of the sails of the AUD and NZD, that had been heading steadily higher earlier since yesterday morning. The AUD had also been boosted after the LTRO auction, almost touching 1.0860, before being knocked back to 1.0760 after Bernanke's comments. Essentially the AUD continues to consolidate its early year gains, in a range just below 1.0800.

Across the Tasman today, we get building approvals and the AiG Manufacturing PMI. Markets will be looking for the PMI to hold onto its recent rise above 50, having bottomed at 42.3 last September. Manufacturing PMI data will also be released in China, Europe and the US. Eurozone unemployment and CPI data is also released. Watch out for Bernanke's address to the Senate tonight. Although it should essentially repeat the message to the House, every word will likely be dissected for nuance.

Fixed Interest

It was a relatively quiet day in NZ markets. Overnight, the ECB's LTRO saw strong demand from European banks.

NZ swap yields got a small nudge higher from the very solid NBBO survey yesterday, that suggested no room for RBNZ complacency. However moves were not large, and swap yields closed up around 2bps across the curve. Over the past couple of week or so, swap yields have essentially been consolidating their strong gains since the start of February. Markets continue to price just under 25bps of RBNZ rate hikes in the year ahead. 2-year yields closed at 3.07% and 5-year yields at 3.77%.

Bond yields closed a fraction higher, with the yield on NZGB21s at 4.08%. The NZ-US 10-year spread has narrowed from 220bps in recent days to around 208bps. The slight pullback in NZ bond yields has contributed, along with an inching up in US 10-year yields to their familiar 2.0% level. The DMO announced another relatively modest tender for today, of 50m NZGB19s and 100m of NZGB23s.

Overnight, the second tranche of ECB funding to European banks through the LTRO took place. The take up by banks was higher than average estimates, at ?529b. Some non-core European bond yields declined on the result, on optimism the funds will help prevent financial dislocation in the region. There is also an expectation funds will directly be used to buy European sovereign bonds. The yield on Italian 10-year bonds fell 17bps to below 5.19%. In January they traded above 7%.

Today we are back in global PMI season with manufacturing data for China, Europe and the US released. If these indicators move up toward, or above, the critical '50' expansion level, general risk appetite should be underpinned. This would give a boost to global long yields, which would feed through to the NZ curve.